The Difference Between a Credit Reference & a Cosigner

Someone who serves as a credit reference or cosigner on a loan shows support for you as a trustworthy borrower. However, significant differences exist in these two roles: A cosigner takes on a much more serious and legally binding position relative to a credit reference who simply offers a voice of support.

Credit Reference Definition

Someone who serves as a credit reference is simply indicating a willingness to share information to a lender or creditor regarding a prospective borrower. Often a family member, friend or business contact, a credit reference is a person familiar with the borrower applicant who is willing to provide verbal or written support of the borrower's likeliness to repay or meet debt obligations. Credit references are common with some loans and are typically for first-time apartment or home renters.

Details

The best benefit of being a credit reference is that you are not risking your personal credit or reputation to support the borrower. You are simply offering information useful to the creditor. A credit reference has no responsibility if the borrower fails to meet loan obligations, is not impacted financially, and is not offering loan funds in connection with the reference.

Cosigner Definition

Cosigning a loan is a much more serious commitment of support to the borrower. Cosigning a loan typically makes you financially responsible should the borrower fail to meet their repayment obligations. In three out of four cases in which borrower's go into loan default, cosigners are required to repay the loan, according to the Federal Trade Commission. Because of your financial commitment to the loan, the creditors are legally required to explain your obligations as a cosigner.

Details

Realize that when you cosign, you are putting your own credit rating and reputation on the line. Family and friends of people without credit history, or that have made a damaging mistake, often want to help them get back on their feet and cosign a loan. While this is sometimes the right thing to do, you have to consider the worst-case scenario and your financial obligation. With a loan cosign, you provide information about the borrower, take on financial payment responsibility and can have your credit rating affected. Despite your commitment to repay the loan if the borrower fails, you do not get access to the loan funds.